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7 Takeaways from Coca Cola’s 2013 Form 10-K

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A company’s securities and exchange filings can serve as a valuable source of information for investors who want to research a prospective investment. The annual form 10-K filed by all publicly traded companies offers a great deal of information and might serve as a good starting point. For example, a review of beverage giant Coca-Cola’s (NYSE: KO) 2013 form 10-K revealed seven important elements useful in determining the investment merit of Coca-Cola (NYSE: KO), as well as revealing its relationship with companies such as Dr Pepper Snapple Group (NYSE: DPS), Monster Beverage (NASDAQ: MNST), and PepsiCo (NYSE: PEP).

What Coco-Cola sells

The section labeled “Business” reveals that Coca-Cola sells two different types of products. First, under the “beverage concentrates” segment, it sells syrups containing concentrates made from sweeteners and flavorings that are sold to authorized bottlers who combine the syrups with carbonated water which get sold to restaurant and convenience store fountains or packaged in bottles and cans to be sold to distributors and retailers. Second, under the “finished products” segment, the company also sells finished bottled products and syrups for use in fountains directly to retailers, distributors, and restaurants via company owned bottlers. According to Coca-Cola’s 2013 form 10-K, syrups garner higher operating margins probably due to the lack of extra expense in packaging and bottling. In 2013, Coca-Cola’s concentrates operations made up 38% and 72% of Coca-Cola’s net operating revenues and total worldwide unit case volume respectively.

Steady growth in overall case volume

According to Coca-Cola’s 2013 form 10-K, the system sold 28.2 billion unit cases last year versus 27.7 billion in 2012, and 26.7 billion in 2011 growing nearly 6% during that time. This provides indication that Coca-Cola still shows small amounts of growth despite its huge size and market dominance.

Sparkling still dominates

Growth in still beverages outpaced growth in every geographical segment with the exception of Europe, probably due to the shift in consumer preference for healthier foods and beverages across the globe. However, in 2013sparkling beverages still comprise 74% of Coca-Cola worldwide unit case volume down from 75% in 2012 meaning that a good portion of its business still comes from a product segment facing permanent structural decline.

Emerging markets lead in growth

In Eurasia & Africa and the Pacific regions unit case volume of finished product grew 7% and 3% respectively meaning that most of Coca-Cola’s growth comes from the emerging and developing regions of the world. By contrast, case volume of finished product remained even versus the same time last year in North America. Latin America saw volume inch up by only 1%. Europe saw overall case volume decline 1%.

Concentrate sales saw a similar distribution in numbers. Eurasia & Africa segment saw 7% and 5% increases. In North America, concentrate sales were even while Latin America and Europe saw a 1% increase and a 1% decrease in sales respectively.

Distribution system provides a moat

Coca-Cola boasts “the world’s largest beverage distribution system” serving as its greatest strength. It even distributes the products of companies such as Dr Pepper Snapple Group in fountain machines across the globe and some of the products for energy drink company Monster Beverage demonstrating that even Coca-Cola’s competitors rely on Coca-Cola for distribution of their products. Coca-Cola’s distribution system serves as a huge barrier to entry for new entrants into the marketplace. In addition, smaller players such as Monster and Dr Pepper Snapple Group need to abide by rules laid down by the King of Beverages—Coca-Cola in order to access its massive distribution system.

One true competitor

This leaves PepsiCo as Coca-Cola’s only true competitor due to PepsiCo’s comparable scale and lack of reliance on Coca-Cola’s infrastructure. However, PepsiCo also sells snacks making Coca-Cola the largest pure non-alcoholic beverage play in the world. PepsiCo’s current strength lies in snacks giving it a leg up on Coca-Cola in terms of product diversity. In 2013, PepsiCo’s snack volume when factoring out acquisitions, divestitures, and currency translations exceeded beverages by a 3 to 1 margin. However, you may argue that Coca-Cola can focus on solidifying its position as global beverage leader.

Underperformed the market for five years

An investment of $100 in Coca-Cola in 2008 would be worth $212 including the reinvestment of dividends versus $230 for the Peer Group Index and $228 for the S&P 500 Index as of the end of 2013, according to the performance graph in Coca-Cola’s 2013 form 10-K. This highlights the fact that an investment in Coca-Cola isn’t always a guarantee of market outperformance. As a result, the market may worry about Coca-Cola’s future given the headwinds it faces from the healthy lifestyles movement.

Foolish takeaway

Coca-Cola’s vast distribution infrastructure will enable the company to dominate the beverage industry for quite some time. Smaller companies such as Dr Pepper Snapple Group and Monster Beverage will continue to bow to Coca-Cola in order to operate in the industry. Unlike PepsiCo, Coca-Cola focuses entirely on beverages making it the largest company in the world that focuses entirely on non-alcoholic beverages giving it economies of scale allowing it to profitably sell more product a lower price.

I appreciate the advice on how to get started with learning about a company. It sounds like the 10-K is a good place to start if I want to know more about what a company sells, how it performs and compares to competitors, and more. Thanks!